Busch: How The Auto "Bailout" Scenario Plays Out

After watching the top three US automakers get grilled on Capitol Hill late yesterday, we get to do it again today! Woo Hoo. At 10 am ET, they appear before the House Financial Services committee. This means the threat of a collapse of the auto industry and dark talk of the ramifications will again dominate the airways, media, and blogosphere. It's like were back in October with Paulson/Bernanke are begging for money and saying how bad things are to the world. It's difficult to generate any equity positives when this Congressional panhandling is happening.

Of course, this isn't just occurring in the U S of A, the FT reports today that European auto companies are requesting a tidy €40bn loan from European Union's Investment Bank or EIU. The EIB’s board of directors on Tuesday discussed the issue and apparently will have a plan ready by December 2nd. Echoing a similar argument by US auto makers, Ivan Hodac, head of ACEA, the European Automobile Manufacturers Association, said: "It is not a bail-out. It is a soft loan to invest in more fuel-efficient technologies." CNBC reports that Chinese executives are now telling the government that they also need emergency measures and are seeking lower taxes on new cars, lower fuel prices and increased grants for research into hybrid cars and new technology.

Last week, I attended the Marcus Evans CFO Summit. I met with Steve Forbes for about 20 minutes and then listened to him speak. Not surprisingly, he made an insightful comment: US auto makers have a successful and profitable foreign operation. Why is it that this is not occurring in the United States? The playing field in this country needs to change to allow these companies to flourish. Congress needs to change the laws regarding the regulation over domestic production for these companies. The dealerships need to be winnowed down and the state termination laws need to be lifted to allow this to occur. The "Jobs Bank" program needs to be reduced or eliminated. The obligations for supporting revenue bonds for closed facilities need to be lifted. These are just a few.

Essentially, the US auto industry is a contractual tower of Babel and there is no coordination amongst federal, state, and local governments to structure a comprehensive deal. This is why the Republicans are skeptical about a loan/bailout. Sen. Richard Shelby (R., Ala.) said he has doubts about whether the money will be enough to meet the industry's needs: "Is this the end, or just the beginning?" according the WSJ. However with Sen. Ted Stevens of Alaska losing his senate seat, the Democrats are likely to have enough votes in the 111th Congress next year to pass what they want for the auto industry.

Remember, here's the list of what they'll have to accept to get the cash in a bill that's currently in the Senate: companies would have to accept limits on executive compensation, allow the government to take stock in the firms, and submit a detailed plan showing how they intend to return to sound financial footing and improve their capacity to produce fuel-efficient vehicles. Interestingly, the Big 3 are to meet with Canadian officials soon as well. How fun would it be if Canada gave them loans first with similar restrictions?

Here's how I think this will play out. The Big 3 get their "bridge" loan. The Big 3 keep struggling and the markets force the issue. The Big 3 go back to Congress for more money and get it. The lifeline gets extended until 2010 when the restructured UAW contracts (pension jettison to the union kicks in) become effective and the autos survive. They will shrink in the process and shrink dramatically. Here's the numbers that stand out: GM has 7,000 dealerships, Toyota less than 1,500, and Honda has 1,000. This is where the industry needs to head to survive and be profitable for the long term.



Andrew Busch

Andrew B. Busch here